Builders Help Buyers to Help Themselves
By Dawn Wotapka
Home builders are working with potential buyers, enrolling them in programs that address everything from credit-report errors to managing debt, in order to raise their credit scores so they can qualify for a mortgage or a better interest rate.
It is another move by a sector desperate to unload inventory as the credit crisis roils the globe, causing lenders to shun borrowers with blemished credit histories and to demand higher credit scores.
Burnishing Buyers
Home builders such as D.R. Horton are turning to credit-enhancement programs to help make potential buyers more attractive to lenders.
Programs address everything from debt-to-income ratios to store-branded cards and budgeting.
Critics say free credit counseling can be had from independent, nonprofit groups with no ties to builders.
The programs, conducted over the Internet and in face-to-face meetings, have recently become "a very, very high focus," said Dean Bloxom, president of imortgage.com, a mortgage banker that works with builder Meritage Homes Corp.
Florida-based Debt Resource USA, which uses certified credit counselors and works with builders such as Hovnanian Enterprises Inc. and M/I Homes Inc., has seen business triple since it started 18 months ago, said Chief Executive David Vizzi. Hovnanian, an industry trailblazer when it rolled out credit-enhancement programs nationwide last year, has more than 100 enrollees.
D.R. Horton Inc., the nation's largest builder by number of annual closings, offers a free credit-improvement program called Home Buyers Club, which assists with credit coaching and analysis and monthly disputes.
Though no one expects the programs to significantly increase sales -- Hovnanian reports just 51 graduates in the last 18 months -- every sale counts for builders as they see earnings plummet, orders tank and cancellations rise as the worst housing correction in decades shows few signs of letting up.
Critics of the programs say credit reports are available for free, and consumers can challenge errors online. In addition, independent groups with no ties to builders offer complimentary assistance and advice.
Consumer Credit Counseling Service of Greater Atlanta Inc. has developed interactive Web-based podcasts, PowerPoint slides, social networking and journals. The nonprofit group suggests all buyers go through prepurchase counseling and a six-hour buyer's workshop.
Builders make their involvement clear to consumers and say they hope the process will build loyalty and lead to a deal for the builder and its mortgage arm.
"It becomes a win-win," said Dan Klinger, president of K. Hovnanian American Mortgage, which doesn't charge potential buyers to work with Debt Resource USA. "We get to sell one of our homes, and the customer gets to clean up his credit and learn good, fiscal responsibility at the same time."
During the housing boom, money flowed freely, even to those with weak credit scores, and builders raked in big profits. But as those buyers defaulted, scores of lenders went out of business and foreclosures swelled to record levels.
Lenders are avoiding risky subprime loans -- which made up 24% of mortgage originations in 2006 -- as well as most of the no-money-down and adjustable-rate mortgages that once inflated sales.
More recently, builders have been hurt by the loss of seller-funded down-payment assistance, in which third parties contribute to the buyer's down payment via the seller. This summer's housing law banned seller-funded down-payment assistance on mortgages insured by the Federal Housing Administration as of Oct. 1, essentially ending the practice.
Qualifying for even a basic 30-year fixed mortgage also has gotten more difficult. Lenders and mortgage insurance companies are scrutinizing credit reports and scores, which detail housing-payment history and length of credit and debt, helping gauge a borrower's risk.
Builders said they screen applicants for their credit-repair programs. They avoid those who refuse to pay bills on time and seek those willing to change payment behavior and aspiring buyers hurt by life events such as a divorce, illness or identity theft.
Everyone involved is aware there is no way to instantly rebuild a tattered score, though addressing errors is a good start. Depending on what needs to be done, the programs can take weeks or months.
The programs address everything from debt to income ratios to why opening a store-branded card at the cash register might not be a good deal. They also teach students about budgeting -- not spending a fortune on furniture for the new house or forgoing that daily latte to build up a safety net should a pipe break or the homeowner get laid off.
Tuesday, October 21, 2008
Thursday, October 09, 2008
There's Work Involved in Buying a Short Sale
Selling for less
Lenders can take so long to approve a mortgage that buyers just fade away.
Margaret Jackson The Denver Post
Article Last Updated: 10/04/2008 09:15:22 AM MDT
Catherine Bacchus has had a frustrating nine months trying to unload her Strasburg home in a short sale.
Three times she's had buyers accepted by the lender. And three times the sale has fallen through.
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.
"We are on our fourth actual buyer that the lender accepted," said Laura Lomba-Berg, a broker with Your Castle Real Estate who is listing the four-bedroom, two-bath house. "The biggest problem is how long (the lenders) take to evaluate things."
In the first three cases, the bank took so long that the buyers were no longer qualified for a loan for which they had already been approved. In two of the cases, market conditions changed and in the third, a health problem prevented the buyer from getting the mortgage.
"The banks are not living in a very logical realm," Lomba-Berg said. "Part of it is the unrealistic information they are basing their decisions on. They're sitting in another part of the world and pulling up desktop comparables."
Comparing real estate sales in a given neighborhood is a standard way of establishing home values. Comparables are often found through computer databases.
In new developments like the Wolf Creek Run neighborhood where Bacchus' home is, the builders are still trying to sell homes and are able to slash prices.
Bacchus, who hasn't made a mortgage payment since July 2007, bought the 1,500-square-foot house for $207,000 in December 2005. She put it on the market Jan. 1 for $138,000.
"Her house was competing with a brand new house, fully furnished for $155,000," Lomba-Berg said. "People are going to gravitate toward that new house with all that furniture."
But often, it's just that the banks are so busy they've had to create special divisions to deal with the properties they own, said mortgage banker Jim Smith of American Guaranty Mortgage.
"If your offer and the way it's structured isn't complete and it isn't packaged correctly, you're going to have some hiccups and it's going to be a rough road," Smith said.
The key, he said, is to be fully preapproved and underwritten before the real estate agent even puts an offer in.
"It's a waste of time otherwise," he said. "You need to show the bank that you're qualified and ready to buy."
Mortgage broker Mike Oswald of American Home Funding said banks have become less flexible in providing loans to homebuyers, so it's a good idea to get the loan first.
"It's always been get a Realtor, find a house, go get a loan," Oswald said. "Now it's the opposite. Now, it's get a loan, get a house."
Will Berry of Foreclosure Brokers LLC said often real estate agents are more harmful than helpful.
"They believe they're going to protect their buyer at all costs because they believe it's a buyers' market," said Berry, whose team helps homeowners and real estate agents in closing pre-foreclosure and short sale transactions. "But when it comes to short sales, it's not a buyers' market."
One reason is that the seller often has not paid — and is unable to pay — the property taxes or homeowners association fees, and the lender isn't willing to pay.
"We've seen buyers walk away from transactions after we have worked for months to get the offer approved because they're refusing to come up with an extra $600 at closing," Berry said.
Lenders can take so long to approve a mortgage that buyers just fade away.
Margaret Jackson The Denver Post
Article Last Updated: 10/04/2008 09:15:22 AM MDT
Catherine Bacchus has had a frustrating nine months trying to unload her Strasburg home in a short sale.
Three times she's had buyers accepted by the lender. And three times the sale has fallen through.
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.
"We are on our fourth actual buyer that the lender accepted," said Laura Lomba-Berg, a broker with Your Castle Real Estate who is listing the four-bedroom, two-bath house. "The biggest problem is how long (the lenders) take to evaluate things."
In the first three cases, the bank took so long that the buyers were no longer qualified for a loan for which they had already been approved. In two of the cases, market conditions changed and in the third, a health problem prevented the buyer from getting the mortgage.
"The banks are not living in a very logical realm," Lomba-Berg said. "Part of it is the unrealistic information they are basing their decisions on. They're sitting in another part of the world and pulling up desktop comparables."
Comparing real estate sales in a given neighborhood is a standard way of establishing home values. Comparables are often found through computer databases.
In new developments like the Wolf Creek Run neighborhood where Bacchus' home is, the builders are still trying to sell homes and are able to slash prices.
Bacchus, who hasn't made a mortgage payment since July 2007, bought the 1,500-square-foot house for $207,000 in December 2005. She put it on the market Jan. 1 for $138,000.
"Her house was competing with a brand new house, fully furnished for $155,000," Lomba-Berg said. "People are going to gravitate toward that new house with all that furniture."
But often, it's just that the banks are so busy they've had to create special divisions to deal with the properties they own, said mortgage banker Jim Smith of American Guaranty Mortgage.
"If your offer and the way it's structured isn't complete and it isn't packaged correctly, you're going to have some hiccups and it's going to be a rough road," Smith said.
The key, he said, is to be fully preapproved and underwritten before the real estate agent even puts an offer in.
"It's a waste of time otherwise," he said. "You need to show the bank that you're qualified and ready to buy."
Mortgage broker Mike Oswald of American Home Funding said banks have become less flexible in providing loans to homebuyers, so it's a good idea to get the loan first.
"It's always been get a Realtor, find a house, go get a loan," Oswald said. "Now it's the opposite. Now, it's get a loan, get a house."
Will Berry of Foreclosure Brokers LLC said often real estate agents are more harmful than helpful.
"They believe they're going to protect their buyer at all costs because they believe it's a buyers' market," said Berry, whose team helps homeowners and real estate agents in closing pre-foreclosure and short sale transactions. "But when it comes to short sales, it's not a buyers' market."
One reason is that the seller often has not paid — and is unable to pay — the property taxes or homeowners association fees, and the lender isn't willing to pay.
"We've seen buyers walk away from transactions after we have worked for months to get the offer approved because they're refusing to come up with an extra $600 at closing," Berry said.
Wednesday, October 08, 2008
One in Six Homeowners "Under Water"
OCTOBER 8, 2008
Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'
More Defaults and Foreclosures Are Likely as Borrowers With Greater Debt Than Value in Their Homes Are Put in a Tight Spot
ByJames R. Hagerty and Ruth Simon
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.
The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.
And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."
Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The majority of homeowners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse" by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.
Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.
Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.
At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. "We were quite shocked," she says.
The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.
Others aren't so lucky. Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.
Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years -- down 44% in a year -- says the publication Inside Mortgage Finance.
One reason is that as home values slip, growing numbers of would-be borrowers lack sufficient equity to refinance. The falling values also make mortgage lending look riskier to banks, spurring them to tighten credit standards.
Most mortgages in default were issued in 2006 and 2007, when lending standards were loosest and the housing market was peaking. Many who bought then made small down payments or none, so they had little equity in their homes from the start.
The performance of loans made earlier is getting worse, too, as price declines deplete the equity people built up. In Las Vegas, 6% of home loans made in 2004 are now 30 days or more overdue, up from 3.7% a year earlier, according to research firm LPS Applied Analytics.
In July, Congress enacted legislation designed to help borrowers who owe more than their homes are worth by allowing them to refinance into a government-backed loan, provided their mortgage company forgives part of their principal. It's not clear how many borrowers the program will help, because before reducing the principal, lenders would almost always try first to freeze or reduce borrowers' interest rate to make payments more affordable, says Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.
In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.
Even so, some borrowers fret that declining prices and tighter lending standards could make it hard for them to tap their equity.
Steven Schneider, a mortgage broker in Miami, bought his home at the end of 1992. When he refinanced about four years ago, he pulled out $150,000 in cash that he intended to use to build an addition. The transaction raised his total debt to about $350,000, at a time when his home had a value of about $650,000.
Recently, Mr. Schneider pulled out roughly $90,000 by tapping a home-equity line of credit. He says he put the funds in a money-market account that yields less than the 5% interest rate on the loan. "I was afraid they were going to shut down" access to the credit line, says Mr. Schneider. He figures his home, once valued at $750,000, now is worth about $600,000.
How much pain homeowners feel varies greatly from place to place. The most severe drops in home values are in parts of California, Florida, Nevada, Arizona and other areas where speculation pushed prices up and builders far overestimated demand.
Within metro areas, neighborhoods with short commutes are holding up better than others. And in many parts of Texas and North Carolina, home prices have continued to rise slowly, have leveled off or have declined only modestly.
On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.
The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
Housing markets don't tend to turn around quickly. The price slump in California in the early 1990s, for instance, was a long grind. According to the S&P/Case-Shiller home-price indexes, Los Angeles prices peaked in June 1990 and didn't bottom until March 1996. They didn't get back to their 1990 peak until 2000.
Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'
More Defaults and Foreclosures Are Likely as Borrowers With Greater Debt Than Value in Their Homes Are Put in a Tight Spot
ByJames R. Hagerty and Ruth Simon
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.
The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.
And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."
Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The majority of homeowners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse" by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.
Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.
Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.
At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. "We were quite shocked," she says.
The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.
Others aren't so lucky. Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.
Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years -- down 44% in a year -- says the publication Inside Mortgage Finance.
One reason is that as home values slip, growing numbers of would-be borrowers lack sufficient equity to refinance. The falling values also make mortgage lending look riskier to banks, spurring them to tighten credit standards.
Most mortgages in default were issued in 2006 and 2007, when lending standards were loosest and the housing market was peaking. Many who bought then made small down payments or none, so they had little equity in their homes from the start.
The performance of loans made earlier is getting worse, too, as price declines deplete the equity people built up. In Las Vegas, 6% of home loans made in 2004 are now 30 days or more overdue, up from 3.7% a year earlier, according to research firm LPS Applied Analytics.
In July, Congress enacted legislation designed to help borrowers who owe more than their homes are worth by allowing them to refinance into a government-backed loan, provided their mortgage company forgives part of their principal. It's not clear how many borrowers the program will help, because before reducing the principal, lenders would almost always try first to freeze or reduce borrowers' interest rate to make payments more affordable, says Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.
In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.
Even so, some borrowers fret that declining prices and tighter lending standards could make it hard for them to tap their equity.
Steven Schneider, a mortgage broker in Miami, bought his home at the end of 1992. When he refinanced about four years ago, he pulled out $150,000 in cash that he intended to use to build an addition. The transaction raised his total debt to about $350,000, at a time when his home had a value of about $650,000.
Recently, Mr. Schneider pulled out roughly $90,000 by tapping a home-equity line of credit. He says he put the funds in a money-market account that yields less than the 5% interest rate on the loan. "I was afraid they were going to shut down" access to the credit line, says Mr. Schneider. He figures his home, once valued at $750,000, now is worth about $600,000.
How much pain homeowners feel varies greatly from place to place. The most severe drops in home values are in parts of California, Florida, Nevada, Arizona and other areas where speculation pushed prices up and builders far overestimated demand.
Within metro areas, neighborhoods with short commutes are holding up better than others. And in many parts of Texas and North Carolina, home prices have continued to rise slowly, have leveled off or have declined only modestly.
On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.
The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
Housing markets don't tend to turn around quickly. The price slump in California in the early 1990s, for instance, was a long grind. According to the S&P/Case-Shiller home-price indexes, Los Angeles prices peaked in June 1990 and didn't bottom until March 1996. They didn't get back to their 1990 peak until 2000.
Tuesday, October 07, 2008
Two Points of View: Is It Time To Buy a Home?
Time To Buy? Contrasting Views
By Erin Peterson • Bankrate.com
The housing market's tumble has left many people wondering if it's time to snap up bargains or if it's still better to stay on the sidelines. Two experts on opposite sides of the spectrum give their best advice to would-be buyers.
Danielle Lynn Babb, Ph.D., is an author, entrepreneur and real estate consultant. A California native, she has appeared frequently on national television and radio. She is the author of several books, including "Finding Foreclosures: An Insiders Guide to Cashin' In on this Hidden Market," and "Real Estate v. 2.0."
Warren R. Bland, Ph.D., is a professor of geography at California State University, Northridge, and has traveled doing geographical research across North America. Bland has also authored books on the topic, including "Retire in Style: 60 Outstanding Places Across the USA and Canada."
Dr. Dani Babb: 'Go for it'
With all the uncertainty in the housing market, buyers have been staying away in droves.
While the reaction may be understandable, it's not necessarily smart.
Some buyers should be taking advantage of the situation -- not sitting on the sidelines and waiting for prices to fall even more, says Babb, real estate analyst. It's not necessarily a wise decision. If you've got good credit, a plan to stay in the new home for a few years and your dream house in your sights, snap it up.
"If you're renting right now, there's a really good chance your mortgage won't be much more than your rent in many areas," says Babb. "You'll get a tax break, and if you stay a few years, you'll see it start to appreciate as well.
While we may not have seen the market bottom out just yet, that's not significant for people who plan on staying in a home for the long haul. "There is a chance that more foreclosures will put downward pressure on prices," she says. "But if you're going to be holding that property for more than five years, another $10,000 or even $20,000 drop isn't going to matter much." The market will recover, and your house will appreciate.
You've also got selection on your side. Homebuilders are offering steep discounts and posh upgrades on brand-new digs. Fixer-uppers and foreclosed properties are selling for a song. Eager sellers are offering incentives from all-expenses paid tropical vacations to brand-new cars to help move their property.
Babb argues that the stricter lending requirements may be a boon for buyers as well. While a prospective buyer might look at the housing market today and worry that an exotic loan might leave them in foreclosure a few years from now, Babb says it's far less likely. You may not get a loan for that million-dollar home, but it's probably because you couldn't have paid for it, anyway.
"Tighter lending standards are a good thing overall, because it helps make certain that a borrower really can afford the home," she says.
Unlike the hot market of a few years ago, where buyers had to put in offers -- often above the selling price -- just days after a house appeared on the market, buyers today are in the driver's seat. You can take your time finding a house, visit it a few times and do necessary research before putting in an offer. And you'll likely be able to haggle with the seller to drop the price, do repairs or pay for closing costs.
Finally, Babb notes that interest rates remain at low levels, which means lower monthly mortgage payments. "As rates drop, those who qualify will find it even less expensive to buy the home of their dreams." Lock in a low rate today and you'll reap the benefits for years to come.
While Babb is bullish on buying, she adds a few caveats. "If you want to buy a property and flip it in six months, now is not the time to get back in the market," she says. "And if you've got a low credit score or are cash-poor, I'd recommend staying away from homes." She also recommends staying away from neighborhoods that have many foreclosures and areas that have sustained significant job losses during the past few years.
Since the market won't likely recover overnight, people who aren't quite ready to buy still have options. Spend the next few months polishing your credentials and get in the market. "Improve your credit score, build up your savings, and go for it," she says.
Dr. Warren Bland: 'Resist temptation to buy'
Bland says that when it comes to the housing slump, we've only seen the tip of the iceberg.
If you think the housing slump is bad now, just wait. Bland says it's about to get much, much worse. Unless you've got no choice, plan to stay put. Prices will likely drop much further and the deals will get even sweeter.
Bland says it's useful to start with a big-picture view: Home prices in some areas doubled or even tripled during the boom during the past several years. Prices have started to drop, but they're still high, he says. "A year or two ago, prices had reached wildly unsustainable levels, and a lot of it was fueled by speculation and funny-money loans," he says. "Prices may have dropped 10 percent or even 25 percent in some cases, but I think they can still drop another 20 (percent) to 40 percent, depending on the market."
As the credit market shrinks, so does the universe of potential buyers who have the means to pay high prices. Spiking prices on food, gasoline and heating oil have taken their toll on consumers. They're worried about recession and losing their jobs, which Bland argues will further dampen demand. "I'm certain we're still nearer to the top of the market than the bottom," he says. "If I had any flexibility, I would resist the temptation to buy now."
The high housing inventories in many markets suggest a significant imbalance between buyers and sellers, according to Bland. Sellers are looking at the prices their neighbors got a year or two ago to justify their prices.
Buyers, meanwhile, see those prices and wait on the sidelines. As bad economic news piles up, they feel little sense of urgency.
While any one of these factors might have an effect on housing prices, all of these in combination may end up being devastating for sellers.
"The mortgage crisis, the swelling inventories, and the threat of recession are combining to create a 'perfect storm' that moves us to a new, lower equilibrium," he says.
Bland points out history is on buyers' side. It took about four years to recover from the previous housing slump in the late 1980s and early 1990s -- which he says suggests there will be a few more years of pain in this downturn before prices begin to stabilize.
Many buyers recognize that it's even more important than ever for a house to be a good investment.
"The traditional pension is disappearing, and with the debt burdens that most people are carrying, it's increasingly difficult for people to save for retirement," he says. "A house is a big asset that can potentially yield cash at retirement through downsizing, relocating to someplace cheaper or taking out cash to invest it."
Bland says he's confident that good things will come to those who wait before buying, but he says there are risks. "Interest rates may go up in the future," he cautions. "And depending how much they go up, that can at least partially undo the advantage of lower prices."
Overall, he says, don't buy simply because you feel the market may be close to the bottom. "Consider whether or not you'd be happy with your home if you saw 20 percent or more of your equity vanish," he says. "I would definitely urge patience."
By Erin Peterson • Bankrate.com
The housing market's tumble has left many people wondering if it's time to snap up bargains or if it's still better to stay on the sidelines. Two experts on opposite sides of the spectrum give their best advice to would-be buyers.
Danielle Lynn Babb, Ph.D., is an author, entrepreneur and real estate consultant. A California native, she has appeared frequently on national television and radio. She is the author of several books, including "Finding Foreclosures: An Insiders Guide to Cashin' In on this Hidden Market," and "Real Estate v. 2.0."
Warren R. Bland, Ph.D., is a professor of geography at California State University, Northridge, and has traveled doing geographical research across North America. Bland has also authored books on the topic, including "Retire in Style: 60 Outstanding Places Across the USA and Canada."
Dr. Dani Babb: 'Go for it'
With all the uncertainty in the housing market, buyers have been staying away in droves.
While the reaction may be understandable, it's not necessarily smart.
Some buyers should be taking advantage of the situation -- not sitting on the sidelines and waiting for prices to fall even more, says Babb, real estate analyst. It's not necessarily a wise decision. If you've got good credit, a plan to stay in the new home for a few years and your dream house in your sights, snap it up.
"If you're renting right now, there's a really good chance your mortgage won't be much more than your rent in many areas," says Babb. "You'll get a tax break, and if you stay a few years, you'll see it start to appreciate as well.
While we may not have seen the market bottom out just yet, that's not significant for people who plan on staying in a home for the long haul. "There is a chance that more foreclosures will put downward pressure on prices," she says. "But if you're going to be holding that property for more than five years, another $10,000 or even $20,000 drop isn't going to matter much." The market will recover, and your house will appreciate.
You've also got selection on your side. Homebuilders are offering steep discounts and posh upgrades on brand-new digs. Fixer-uppers and foreclosed properties are selling for a song. Eager sellers are offering incentives from all-expenses paid tropical vacations to brand-new cars to help move their property.
Babb argues that the stricter lending requirements may be a boon for buyers as well. While a prospective buyer might look at the housing market today and worry that an exotic loan might leave them in foreclosure a few years from now, Babb says it's far less likely. You may not get a loan for that million-dollar home, but it's probably because you couldn't have paid for it, anyway.
"Tighter lending standards are a good thing overall, because it helps make certain that a borrower really can afford the home," she says.
Unlike the hot market of a few years ago, where buyers had to put in offers -- often above the selling price -- just days after a house appeared on the market, buyers today are in the driver's seat. You can take your time finding a house, visit it a few times and do necessary research before putting in an offer. And you'll likely be able to haggle with the seller to drop the price, do repairs or pay for closing costs.
Finally, Babb notes that interest rates remain at low levels, which means lower monthly mortgage payments. "As rates drop, those who qualify will find it even less expensive to buy the home of their dreams." Lock in a low rate today and you'll reap the benefits for years to come.
While Babb is bullish on buying, she adds a few caveats. "If you want to buy a property and flip it in six months, now is not the time to get back in the market," she says. "And if you've got a low credit score or are cash-poor, I'd recommend staying away from homes." She also recommends staying away from neighborhoods that have many foreclosures and areas that have sustained significant job losses during the past few years.
Since the market won't likely recover overnight, people who aren't quite ready to buy still have options. Spend the next few months polishing your credentials and get in the market. "Improve your credit score, build up your savings, and go for it," she says.
Dr. Warren Bland: 'Resist temptation to buy'
Bland says that when it comes to the housing slump, we've only seen the tip of the iceberg.
If you think the housing slump is bad now, just wait. Bland says it's about to get much, much worse. Unless you've got no choice, plan to stay put. Prices will likely drop much further and the deals will get even sweeter.
Bland says it's useful to start with a big-picture view: Home prices in some areas doubled or even tripled during the boom during the past several years. Prices have started to drop, but they're still high, he says. "A year or two ago, prices had reached wildly unsustainable levels, and a lot of it was fueled by speculation and funny-money loans," he says. "Prices may have dropped 10 percent or even 25 percent in some cases, but I think they can still drop another 20 (percent) to 40 percent, depending on the market."
As the credit market shrinks, so does the universe of potential buyers who have the means to pay high prices. Spiking prices on food, gasoline and heating oil have taken their toll on consumers. They're worried about recession and losing their jobs, which Bland argues will further dampen demand. "I'm certain we're still nearer to the top of the market than the bottom," he says. "If I had any flexibility, I would resist the temptation to buy now."
The high housing inventories in many markets suggest a significant imbalance between buyers and sellers, according to Bland. Sellers are looking at the prices their neighbors got a year or two ago to justify their prices.
Buyers, meanwhile, see those prices and wait on the sidelines. As bad economic news piles up, they feel little sense of urgency.
While any one of these factors might have an effect on housing prices, all of these in combination may end up being devastating for sellers.
"The mortgage crisis, the swelling inventories, and the threat of recession are combining to create a 'perfect storm' that moves us to a new, lower equilibrium," he says.
Bland points out history is on buyers' side. It took about four years to recover from the previous housing slump in the late 1980s and early 1990s -- which he says suggests there will be a few more years of pain in this downturn before prices begin to stabilize.
Many buyers recognize that it's even more important than ever for a house to be a good investment.
"The traditional pension is disappearing, and with the debt burdens that most people are carrying, it's increasingly difficult for people to save for retirement," he says. "A house is a big asset that can potentially yield cash at retirement through downsizing, relocating to someplace cheaper or taking out cash to invest it."
Bland says he's confident that good things will come to those who wait before buying, but he says there are risks. "Interest rates may go up in the future," he cautions. "And depending how much they go up, that can at least partially undo the advantage of lower prices."
Overall, he says, don't buy simply because you feel the market may be close to the bottom. "Consider whether or not you'd be happy with your home if you saw 20 percent or more of your equity vanish," he says. "I would definitely urge patience."
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